SALUS Ljubljana d. d (LJSE:SALR) Seems To Use Debt Rather Sparingly

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies SALUS, Ljubljana, d. d. (LJSE:SALR) makes use of debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for SALUS Ljubljana d. d

What Is SALUS Ljubljana d. d's Debt?

You can click the graphic below for the historical numbers, but it shows that SALUS Ljubljana d. d had €10.6m of debt in September 2020, down from €12.6m, one year before. However, it does have €6.97m in cash offsetting this, leading to net debt of about €3.58m.

A Look At SALUS Ljubljana d. d's Liabilities

We can see from the most recent balance sheet that SALUS Ljubljana d. d had liabilities of €78.3m falling due within a year, and liabilities of €14.1m due beyond that. On the other hand, it had cash of €6.97m and €56.3m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by €29.1m.

SALUS Ljubljana d. d has a market capitalization of €91.9m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

SALUS Ljubljana d. d has a low net debt to EBITDA ratio of only 0.28. And its EBIT easily covers its interest expense, being 42.4 times the size. So you could argue it is no more threatened by its debt than an elephant is by a mouse. On top of that, SALUS Ljubljana d. d grew its EBIT by 42% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is SALUS Ljubljana d. d's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. During the last three years, SALUS Ljubljana d. d generated free cash flow amounting to a very robust 82% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Our View

SALUS Ljubljana d. d's interest cover suggests it can handle its debt as easily as Cristiano Ronaldo could score a goal against an under 14's goalkeeper. And that's just the beginning of the good news since its conversion of EBIT to free cash flow is also very heartening. It's also worth noting that SALUS Ljubljana d. d is in the Healthcare industry, which is often considered to be quite defensive. Considering this range of factors, it seems to us that SALUS Ljubljana d. d is quite prudent with its debt, and the risks seem well managed. So we're not worried about the use of a little leverage on the balance sheet. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 1 warning sign for SALUS Ljubljana d. d that you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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